When it comes to protecting your wealth and passing it on to those you love, wills are often not as straightforward as they seem. Speak to any family lawyer and they will provide countless examples of estate warfare and why it’s important to build a plan.
So what can you do to avoid this?
Estate planning experts say because each person’s circumstances are different, it’s important to have your will drafted by an expert lawyer.
“A lot of people think the document is the critical thing, but the reality is it’s the advice that is important,” says Anna Hacker, a wills and estate accredited specialist at Australian Unity.
“If you have a will that doesn’t have the right advice, it won’t do what you want it to do.
“Instead of your beneficiaries getting an inheritance, your wealth may end up with some random person you’ve never met. This is increasingly the case with divorce and blended families being a fact of life.”
And the stakes are high, according to Peter Townsend, principal at Townsends Business and Corporate Lawyers.
“We’re in the early stages of what has been called the greatest wealth transfer in history. Over the next 15 years in Australia many billions of dollars of assets are going to be transferred through the estates of baby boomers who are shuffling off this mortal coil.”
“He says the reality is that a poorly constructed will that doesn’t take advantage of tax benefits or overlooks super and insurance may be disadvantageous to beneficiaries, depriving them of tax savings and inheritance protection.
Blended family complications
“You have to think a few steps ahead with estate planning,” says Hacker.
“Almost every client we see has some aspect of a blended family that they need to look at, whether it’s for themselves or their children.
Even if they themselves have been married for a long time, someone in the beneficiary pool will have some issue with blended families. They’ll say, ‘I want my daughter’s kids to get her inheritance if she passes away but she has a stepson and I don’t want him to benefit.’
“It’s definitely not one-size-fits-all. That’s where the complications happen with DIY wills – they presume what people want to do. You can’t have a one-size solution, especially with blended families – it’s case by case.”
The critical thing when doing a will is to understand what your assets are and how they are held, says Hacker.
“If all your assets are jointly held when you pass away, there’s actually nothing in your estate at all. It automatically goes to someone else.”
How assets are owned to begin with plays a role, which is why seeing a lawyer before making big transactions is important.
This is especially the case with the matrimonial home if it’s owned as joint tenants.
“It means when one of you dies the property automatically goes to the other. It doesn’t go through your estate or your will so there’s no ability for family or other interested parties to cause problems in relation to that transfer,” says Townsend.
“Alternatively, you can hold your home as a tenant-in-common, which means when you die your interest in it goes into your estate and is dealt with under your will. Your share of the property can be given to somebody else, not necessarily your co-owner.”
Plan your will to avoid strangers
The latter is often used by blended families or where a spouse is concerned their partner may establish a subsequent relationship.
“They might say, ‘If I die and I give all of my assets to my spouse and he takes up with somebody else, then dies, and he has given those assets to his new partner, my estate could end up in the hands of a complete stranger.’
“The other device we use is what we call a mutual will where parties both agree their wills will mirror one another and won’t be changed after the death of the first spouse,” says Townsend.
“What we’re concerned about here is that on the death of the first spouse the survivor takes up with somebody and then decides to change their will and cuts the children out. One way around that is mutual will agreements.”
Townsend says given the amount of wealth that is going to be transferred, if it’s very substantial, a family lawyer will say, ‘Look, if your child is going to receive a very substantial inheritance one way or the other, then they need to have a prenuptial agreement.’ ”
He says this can be entered into at any time.
“It can be either before a relationship, during or indeed after – there’s no requirement that it be in advance of the marriage.”
But, he says, “It’s very hard to get young married people who are obviously imbued with romantic bliss to come to grips with something as hard-nosed as estate planning.”
When it comes to super, your will can’t regulate what happens to your death benefit. It is the one area where you do have a lot more ability to direct where assets go, says Hacker.
“A will can be challenged. With super, if you have a binding death nomination there’s nothing that can be done – even if you excluded all those you should have included. So if you have three kids and left everything to one, and you have a valid binding death nomination, it can’t be challenged.”
A binding death nomination usually has to be renewed every three years.
It’s easy to see why estate planning can be a minefield. The Townsends’ website has a checklist that helps clients understand what’s involved (see townsendslaw.com.au/product-services/details/76).
Protect your assets
Depending on your circumstances, setting up a testamentary discretionary trust in your will may be the answer.
The trustee has the discretion to decide how the assets and income of the trust are to be distributed to the beneficiaries. It’s useful for:
• Asset protection;
• Family asset retention;
• Protection of vulnerable beneficiaries;
• Providing for the current spouse while ensuring the deceased’s children ultimately get estate capital; and
• Tax benefits for infant beneficiaries.
“It’s for someone who wants to protect the estate for future generations, otherwise a standard will is fine,” says Hacker.
“People will come in and say, ‘Why would I need a testamentary trust?’ There are a few main reasons it appeals: asset protection, relationship breakdown and blended families or minimising tax.
“I would say probably 80% of our clients have wills incorporating testamentary trusts, mostly because people’s lives are becoming more complicated and they’re wanting to cover all those different scenarios.
“It’s never presumed that just because they have $2 million they are going to need a testamentary trust. It’s really about what they want to do for their beneficiaries. Essentially, the testamentary trust is more for the beneficiaries than the testators. They won’t be around when it’s being administered.”
Hacker says the most common concern is relationship breakdown and especially blended families.
“They’ll say, ‘I want my bloodline to be protected. I want it to go to my kids, grandkids, great-grandkids, not some other random person that I don’t know very well.’ ”
While the trust adds an extra level of complexity and cost, the benefits are significant.
“The beauty of the trust relationship is while you may be the beneficiary of the trust – the person who ultimately gets the benefit of the property – you don’t own it so your creditors can’t get at it, an estranged spouse can’t get at it and your kids can’t get at it, unless you decide otherwise.”
Tax advantages for children under 18 are a big plus, unlike with a family trust, where children pay a tax penalty above a small amount. It can make an important difference.
“Take, for example, a husband and wife who have two children, the husband is killed in an industrial accident and the estate money goes into the trust, where it can be invested. Between the wife and her two kids they can earn close to $60,000 tax free before they start to hit the marginal rate.”
It can also be a lifesaver, especially in relation to children you want to protect for various reasons.
“That would be children that have a physical or mental disability, children who have an addiction problem, whether it’s drugs or alcohol or gambling, or even children who are incredibly naive. What that trust is doing is protecting the child against themselves.”
While you may need to pay $3000-$5000 to set up a discretionary trust, Townsend says that, apart from the peace of mind it offers, “it’s money well spent to protect the family and ensure everything goes according to plan”.